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VIDEO CASE 11-1 My Own Meals: Setting Retail Prices

"The kids generally like the fast-food meals. I tend to not like them because I try to stay away from the high fat," says Angela Harmon, mother of three young girls. "I have to have something that is nutritious and fast," remarks Mary Champlain, mother of two. Comments like these and her own experiences led Mary Anne Jackson to conclude that there was an opportunity to provide parents with better children's food options. As Mary explains, "Being a busy working mother, I knew that there was a need for this type of product in the marketplace."

THE IDEA Mary's insight about the marketplace was supported by several socioeconomic trends. For example:

More than 65 percent of working mothers now have school-age children, the highest percentage ever.
About 90 percent of children under the age of 7 eat at McDonald's at least four times per month.
More than 90 percent of homes in the United States now have microwave ovens.
Women already represent almost half of the total workforce.

In addition, research has shown that children have a big influence on their parents' food and meal choices. Children aren't biased toward cooking a dinner from scratch; in fact, children love using microwave ovens. Children also respond to consumer advertising and packaging. Typical favorites for children include hot dogs, macaroni and cheese, pizza, chicken nuggets, and spaghetti. Most importantly, though, children like having their own meals.

With this evidence, some food industry experience and business education, and a lot of entrepreneurial spirit, Mary Anne Jackson set out to satisfy the need for nutritious, convenient children's meals. Her idea: develop a line of healthy, microwaveable meals for the 30 million children 2 to 10 years old.

THE COMPANY Ms. Jackson started by founding a company, My Own Meals, Inc. (www.myownmeals.com), with a line of five healthy microwaveable meals. The meals were offered in shelf-stable "retort" packages, which are like flexible cans. This created a whole new category of prepared foods and raised more than a few eyebrows among the major food companies. Mary observed that "the need for children's meals was not being addressed in the past, and I think this was because most major food companies are run by men." Eventually, however, the big companies challenged My Own Meals with their own entries into the new category. Tyson, Banquet (Con Agra), and Hormel each introduced new children's meals, although Tyson and Banquet launched frozen meals. The competition reinforced Mary's efforts, "Having competitors come into the marketplace justified the existence of the category," she explains.

The product line was developed using a lot of marketing research-hundreds of busy mothers provided input about product quality, usage rates, and price. The results indicated that customers would serve their children high-quality meals between three and four times each month and that they would be willing to pay approximately $2.30 for each meal. Based on this information Mary estimated that the potential retail market was $500 million!

My Own Meals, Inc. became the market leader of children's meals with its line of natural, refrigeration-free, long-life meals specifically developed for the taste and nutritional needs of children. The five-product line included "My Turkey Meatballs," "My Kind of Chicken," "My Meatballs and Shells," "Chicken, Please," and "My Favorite Pasta." My Own Meals, Inc. products were sold through grocery stores and by mail order throughout the United States. Organizations such as the Feingold Association which recommends products to parents of allergy-prone children, the American Dietetics Association, the Public Voice, and others became supporters of the new emphasis on nutrition and taste for children.

THE ISSUE: SETTING RETAIL PRICES "We were trying to decide if we were priced appropriately and competitively for the marketplace, and we decided that we would look at the price elasticity for our product line," observes Mary Anne Jackson. "We found that the closer we came to $3.00 a unit, the lower the volume was, and overall we were losing revenues and profits," said Jackson.

To arrive at final retail prices for her company's products Mary Anne Jackson considered factors related to demand, cost, profit, and competition. For example, because lower-quality brands had entered the market, My Own Meals needed a retail price that reflected the superior quality of its products. "We're premium priced because we're a higher quality product than any of our competitors. If we weren't, our quality image would be lowered to the image that they have," explains Jackson. At some stores, however, prices approached $3.00 and consumer demand decreased.

To estimate the prices consumers would see on their shelves, Jackson needed to estimate the cost of producing the meals and add My Own Meal's markup. Then she determined the markup of each of the distribution channels-retail grocery stores, mass merchants, day care centers, and military commissaries-would add to reach the retail price. The grocery stores were very concerned about profitability and used a concept called direct product profitability (DPP) to determine prices and shelf space. "They want to know how much money they make on each square foot of the shelf dedicated to each product line. I had to do a DPP analysis to show them why they were making more on our products for our space than the competition," remarks Mary Anne Jackson. Finally, Mary considered competitors' prices, which were:

Looney Toons (Tyson) $2.49
Kid Cuisine (Banquet) $1.89
Kid's Kitchen (Hormel) $1.19

Mary knew that it was important to consider all of these factors in her pricing decisions. The price would influence the interest of consumers and retailers, the reactions of competitors, and ultimately the success of My Own Meals!

Questions

In what ways are the demand factors of (a) consumer tastes, (b) price and availability of substitute products, and (c) consumer income important in influencing consumer demand for My Own Meals products?
How can (a) demand-based, (b) cost-based, (c) profit-based, and (d) competition-based approaches be used to help My Own Meals arrive at an approximate price level?
Why might the retail price of My Own Meal's products be different in grocery stores, mass merchants, day care centers, and military commissaries?

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